Thursday, March 12, 2009

Stimulus Monster Hungry, Needs More

Treasury Secretary Timothy Geithner urged the Group of 20 nations to take “forceful” actions to end the financial crisis and called for an expansion of the International Monetary Fund’s supplementary borrowing program by about $500 billion.

“This is a global crisis which requires a global response,” Geithner said yesterday in a statement from Washington. “G-20 countries must take strong macroeconomic and financial sector measures.” A “reasonable benchmark” is the IMF’s recommendation for stimulus equivalent to 2 percent of a nation’s gross domestic product, Geithner said.

Geithner will make the recommendations at a meeting starting tomorrow near London of finance ministers from 20 of the world’s industrial and developing nations that will lay the groundwork for a summit of leaders on April 2 in London.

2% of GDP is probably small based on the demand shortfall. That is roughly equivalent to our stimulus, which many economists believe is insufficient. And yet the EU is pushing back on this call for increased public spending.

But many European leaders say they have stimulated their economies enough. What the world needs now, they say, are tougher, globally enforced regulations on financial markets to avoid a repeat of the mistakes that led to the current troubles.

This week, they pushed back against Obama's plan.

"We are not ready to increase the packages we have established for the current situation," said Jean-Claude Juncker, prime minister and finance minister of Luxembourg and head of a European economic commission that met Tuesday in Brussels.

"The Americans should be more modest about giving lessons, because the crisis comes from them," Patrick Devedjian, France's minister for recovery, said in a TV interview.

Of course, this is true, but it's also entirely besides the point. There is a consistent global demand problem and it hardly matters where it came from. Failure to stimulate the economy now will lead to greater debts in the future as world economies spiral downward and revenues dry up. I don't disagree that regulatory reform is essential, but the real-world impact of a lack of demand is more far-reaching.

Meawhile, there is the question of whether American lawmakers are willing to lead by example. Nancy Pelosi signaled openness to a second stimulus if the economy needed one, but quickly walked the comments back, preferring to wait and see how the initial program is implemented along with the omnibus spending bill. This is probably prudent, but of course you have the neo-Hooverist wing best exemplified by Meghan McCain:

This morning on Fox & Friends, John McCain’s daughter Meghan McCain railed against President Obama for signing the omnibus spending bill yesterday. “I think it’s so disappointing and it’s scary,” McCain said, referencing the earmarks in the bill. “Hope and change – what’s going on?” She added, “This second stimulus package that Nancy Pelosi’s talking about I think doesn’t make sense.”

Meghan McCain’s comments this morning are surprising, given that last night she was telling MSNBC host Rachel Maddow that she doesn’t know much about the economy. Here’s how McCain responded when Maddow asked her whether she agrees with her father’s call for a spending freeze:

McCAIN: Spending freeze? You know, econ – economic things, I said this last night on Hannity, I said is my — I didn’t even take econ in college. I don’t completely understand it so I’d hate to make a comment one way or the other. That’s – truly of all the things – I keep reading and I just don’t understand it.